Life at Netflix after Starz

by Anthony John Agnello | February 29, 2012 2:46 pm

It’s out of the frying pan and into the fire for Netflix (NASDAQ:NFLX[1]) this week. Since 2012 began, the streaming video company has, if not recovered from its value implosion last fall, at least stopped the bleeding. Thanks to a strong fourth quarter, international expansion plans, and a stable subscribership above 24 million users, Netflix proved that the end wasn’t nearly as nigh as Wall Street thought.

Now Netflix CEO Reed Hastings’ embattled company has to plug another leak: The loss of Starz movie content from the service. Starting Thursday, Starz content will disappear from Netflix’s library.

Negotiations between Liberty Media‘s (NASDAQ:LSTZA[2]) premium movie cable channel Starz and Netflix stalled out last September. It may seem like small potatoes to lose one contract when your streaming video service hosts tens of thousands of other movies and television programs, but Netflix has relied on Starz for some of its highest-profile programming.

The Starz deal brought major movie releases from Sony (NYSE:SNE[3]), Disney (NYSE:DIS[4]), and other studios to Netflix Instant Streaming within the sought-after “HBO Window”—the period of time between a movie’s release on DVD to home viewers and its availability from digital services like Netflix. Starz said that it was ending its contract with Netflix to “protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content.”

Preemptive maneuvers

Netflix has been bracing itself for Starz’s departure. Just weeks after Starz announced in September that it was leaving, Netflix signed content deals with Dreamworks (NASDAQ:DWA[5]), CBS (NYSE:CBS[6]), and an independent deal with Disney that brought in both theatrical content and television programming from ABC and the Disney Channel. Netflix even started airing original content in February with the new series Lillyhammer, starring Steven Van Zandt.

Still, streaming users are going to notice when 1,000 movies, including hits like Toy Story 3, are pulled from the service. And a group of angry customers is the last thing Netflix wants to contend with right now. Subscriber outrage over having to pay more to rent DVDs last summer nearly sunk the company.

For now, all Netflix can do is continue to sign new content distribution deals with movie distributors directly rather than rely on other premium subscription services like Starz, which now recognize Netflix as the biggest threat to their operations. To that end, Netflix hasn’t slowed down its expansion. The company announced on Feb. 21 that it’s signed a new deal with The Weinstein Company. Under the deal Oscar winner The Artist and nominee Undefeated will be available on Netflix before any other pay service.

Pondering Liberty Media’s next move

Will Starz come crawling back? Liberty Media clearly has something in mind for the brand’s future. Interest in the company’s tangled web of properties—including the Starz television channels, the Live Nation concert business, and the company’s stake in Barnes & Noble (NYSE:BKS[7])—remains high, especially after Warren Buffet‘s Berkshire Hathaway (NYSE:BRK.B[8]) bought into it last Thursday.

If Liberty Media intends to start its own Starz streaming service as a way to preserve “the appropriate pricing and packaging of our exclusive and highly valuable content,” it should think twice. The streaming video market is getting more crowded by the day, with News Corp.‘s (NASDAQ:NWS[9]) BSkyB staking a claim on the streaming market in the U.K., Amazon‘s (NASDAQ:AMZN[10]) instant service growing by the day, and now Comcast (NASDAQ:CMCSA[11]) getting in the game with Xfinity Streampix.

Even Time Warner‘s (NYSE:TWX[12]) HBO is expanding its own streaming operation, bringing its HBO Go service to living room devices like Microsoft‘s (NASDAQ:MSFT[13]) Xbox 360. HBO can do that thanks to its popular original programming, but frankly Starz doesn’t have a series like HBO’s Game of Thrones to lure in potential streaming subscribers.

Its content may be gone from Netflix this week, but Starz may find its way back to the service sooner rather than later.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello[14] and become a fan of InvestorPlace on Facebook.[15]